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A limited Superpower: the next phase of development.

A World Bank estimate that the Chinese economy will surpass the U.S. this year to become the world’s biggest (based on purchasing power parity) has received very short shrift in China. There’s none of the triumphalism that might be expected from receiving such an accolade, and the muted response is telling.
 
 
China may welcome the implied power behind such status, but Beijing doesn’t want the responsibility of leading global discussions on pressing issues such as climate change, Israel-Palestine or international financial regulation. As far as the Communist Party of China is concerned, there’s more than enough to be doing at home without having to take the reins on fixing and managing the global system, as the U.S. has done, and Britain did before.
 
 
The findings of the 2011 International Comparison Program from the World Bank estimated that China’s economy is expected to surpass the U.S. this year on a purchasing power parity basis. Economists, including those at Goldman Sachs, have been forecasting for some time that China will become the world’s biggest economy on a GDP basis well before the middle of this century (in nominal terms, China’s GDP was $9.2 trillion last year against the U.S.’s $16.8 trillion, based on International Monetary Fund data). According to the breathless media coverage outside of China, the latest PPP measurement suggests that that day has arrived, providing fodder for those predicting America’s decline and a Chinese century. But the estimates again highlight the flaws of measuring economic size based on purchasing power parities.
 
 
Economists argue that PPP measurements, which are designed to estimate prices in a given country with exchange rates stripped out of the formula, are an inaccurate gauge of economic size. This is in part owing to problems with measuring prices from country to country and the infrequency with which they are measured.
 
 
Statistics agency dismissal
China’s National Bureau of Statistics dismissed the findings a few days after the release of the World Bank report, saying that inflation estimates were underestimated and GDP estimates were overestimated. “Due to its limited methodology and defects in applying the results, it failed to sufficiently reflect China’s reality,” the statistics office said in a short statement.
But China’s muted response to the World Bank report goes deeper than problems with how the estimates were made. In rejecting the World Bank’s assessments, China’s government was acknowledging that this vast and populous country’s economic development is far from a world-beater.
 
 
The Communist Party has long known that it must be careful not to overdo its economic triumphalism, given how much of Beijing’s legitimacy to rule hangs on its ability to raise living standards consistently for China’s 1.4 billion people. As economic growth and incomes slow, the party must be even more careful.
 
 
In an interview four years ago, People’s Bank of China Vice-Governor Yi Gang said China’s economy had surpassed Japan’s to become the world’s second largest. That triggered a similar wave of global coverage about China’s rise which largely failed to report Yi’s qualifications to his statement. Yes, Yi said, China has overtaken Japan, but the pace of economic growth is only set to slow as its base becomes larger and as environmental and resource constraints bite. Asked later in the interview about a Russian forecast that the yuan is set to become a world reserve currency and challenge the dollar’s dominance – something Moscow is keen to see for geopolitical reasons – Yi was even more explicit. “China is still a developing country and we should know our limits,” he said.
 
 
‘...China’s muted response to the World Bank report...was acknowledging that this vast and populous country’s economic development is far from a world-beater.‘
 
 
Even as a newly-assertive People’s Liberation Army throws its weight around in Asian waters, as China presses ahead with high profile ventures such as its ambitious space program, and as the country invests billions in developing and developed economies, its leaders remain very inward looking.
 
 
A limited Superpower
China’s economic rise, coupled with the humbling of the western economies after the global financial crisis, has seen a shift in how Beijing projects its power. It’s perhaps understandable that China’s leadership appears less willing to countenance calls from the West on how to run its economy and its foreign policy (demands for political change and improved human rights have almost always been rejected out of hand). But China’s development is incomplete by a wide margin, and that provides strict limits to its global assertiveness.
 
 
PPP measures may suggest that China is a global leader – and all that that encompasses – but the government’s preferred measures of per capita GDP and urbanization rates suggest the Communist Party has much still to do. China’s per capita GDP stood at just over $6,000 in 2012, according to World Bank statistics, nearly double the 2009 level and in sight of Asian peers such as Malaysia. But it was way below the $51,749 of the U.S.
 
 
In fact, China’s leaders worry that the economy is more likely to be headed in Malaysia’s direction than it is to become a direct challenger of the U.S. for global dominance. Malaysia is often cited as one of a number of countries believed to have fallen into the “middle income trap,” when the dividends of an early push for industrialization fade and income levels languish below developed country rates.
 
 
As wages have surged and its population begins to age, China’s leadership is acutely aware of this risk. The “Decision” document which followed last November’s 3rd plenum is an ambitious blueprint for reform which is effectively designed to avoid this trap through deregulation and integrating China more fully within the global economy.
 
 
Meanwhile the economy slows...
Even as the World Bank report has reinforced preconceptions about China’s supremacy and the end of American dominance, the Chinese economy has slowed sharply towards 7% from as much as 15% during the last decade. A growing number of China bears see growth continuing to slow towards the low single digits this decade, with an increasing share of economic resources channelled towards servicing debt.
 
 
But China’s senior leadership believes that urbanization will continue to spur economic activity. China’s urbanization rate is now at around 53% -- in 2012, more Chinese people lived in urban areas than in rural areas for the first time in the country’s history – and the government sees the proportion rising to 60% by 2020. It foresees urbanization rates rising further towards U.S. levels at around 70% sometime in the decades after.
 

 
Those goals envision nearly 240 million people moving into urban areas, or at least living in upgraded rural areas, some time before the end of the next decade. The need to bring that many people – the equivalent of the population of Indonesia – off the fields and into the cities is a sobering counterpoint to headlines about being the world’s number one.
 
 
China’s government often describes meeting its development goals as an “arduous task”, but it isn’t just lip service. With growth slowing and economic risks rising, urbanizing 240 million people over the next decade or so promises to be considerably more difficult than accommodating the previous 240 million. Faced with that considerable challenge, it’s unsurprising that Beijing isn’t buying into this accolade.
 

 

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